Many people, including myself, have asked this question. I have spent many months debating this and am still unsure about the answer. So, this is more like a discussion within my writings rather than a full answer for you. In short, if you can get a property that is low enough in price, is rentable, and you can take a 30-40% in rent costs in the future - it is a good buy. The reason I say 30% to 40% is because, as we all know, in the current market prices could go down.

I have been reading many books and one that stands out is Harry S. Dent’s book, “The Coming Depression.” This book uses demographics to predict the future. While this might not be 100% accurate, it will give you a better look into the future. This demographer says that we are at a point where we have more people in older generations than those in younger generations. This means that the baby boomers will be supported by less “echo boomers.” This means that there could possibly be less people renting, driving rent prices down. Also in the wake of all this is the future fewer places needing to be rented, which will cause an excess of properties. Thus, driving prices down even lower. However, if you get the price for low enough and a 40% in rent, it is a 100% sure buy. At least to me it is a for sure buy.

What if this guy is wrong? The way I look at it, I have better chances of him being correct because his past predictions of this credit melt down and the dow having a run up after the year 2000. Because he was correct, I have to assume he will be right again with his predictions. If he is wrong, I only loose additional capitol. If he is right, I will not stand to loose capitol.

Note: He also predicts that housing prices will fall AFTER a small run-up in the coming months/year.

The capitalization rate, or cap rate, is the ratio between the annual net operating income given by an asset (this is usually used for real estate, so real estate is usually the asset) and the asset’s capital cost (capital cost is the original price paid for the asset) or the asset’s market value.

The equation is as follows:

Capitalization Rate (”Cap Rate”) = Annual Net Operating Income/Capital Cost (or Market Value)

This equation is important for an investor to pay attention to as it shows how well their investment is doing and if it is profitable against the opportunity cost of putting that money in a different investment. A similar concept to the ROI (Return on Investment) formula

A trophy asset is a term used by many real estate investors to describe the properties that everybody wants to get a hold of in the market.

Last Thursday on the 13th of November in 2008 Todd Gooding, President of SKB Real Estate Investors, gave a presentation at my school the University of Oregon. Todd was also an Oregon Duck. His company is very successful in the western part of the United States and is located in Portland, Oregon. They focus primarily on aquiring retail, office, and industrial real estate and then enriching their value to turn a profit. You can visit their website here if you’d like.

I found his presentation to hold a lot of gems about investing in general, but in particularly about real estate investing and I’d like to share a few. As a novice to real estate investing some may seem pretty obvious, but they still sparked thoughts for me.

• Real estate value is driven by employment growth and population growth.
• To up a property’s value there are multiple things to consider: is the property fully leased? are there construction issues? entitlement issues? environmental issues? –When these things exist they can be fixed to find a profit on the investment, ideally an investment should have more than one of these issues to be truly profitable.
• A tenent shouldn’t be leasing more than 30% of the property. This is because you don’t want the tenent saying how the lease works, you don’t want them to have the power. This way you diversify your income stream. Keep in mind that Todd’s company deals with retail, office, and industrial properties, not housing. If you were renting a house it would be difficult to be able to have multiple tenents, but when you’re renting an office building or a strip mall, it’s much easier to have multiple tenents.
• Real estate is a local business. This is because you must be very knowledgeable about the area and you should also be available to go there in person, otherwise you assume a much greater risk.
• You want the worst buildings in the best locations.
• Stick to what you’re familiar with. (I say: then become familiar with more! haha)
• You don’t need to squeeze the last ounce of value out of an investment, leave some meat on the bone for the next guy.
• Port cities tend to have less votility in their cap rates.

An important thing to note about Todd and his company is that when the real estate bubble burst they were not hurt as much as the next guys. Todd attributed this to “not getting caught up in the euphoria”. Not getting caught up in the euphoria of any bubble, a “the price is never going to go down!” mentality, is an important discipline for investing in any market.